5

Back Away, Blockbuster

"Troublesome signs here indicate that Blockbuster isn't in tune with what consumers want," I wrote two years ago, when former Blockbuster (NYSE: BBI) CEO John Antioco was warming to the notion of rolling out a digital-delivery service that included the purchase of a hardware storage device.

"Conventional wisdom says consumers don't want another set-top box," he said at the time. "I'm not sure I'm in that camp."

Antioco's ghost has apparently not left the building. The Hollywood Reporterclaims that current CEO James Keyes will roll out a set-top box solution to get Blockbuster into the game later this month.

It was a stupid idea then. It's an even stupider idea now.

The digital detourNo one will argue that digital delivery isn't the future. The perks of crisp DVD quality, enhanced bonus material, and now the migration to Blu-ray will buy optical discs a few more years, but not an eternity. Tomorrow will be a more level playing field, where the actual studios -- more than the middlemen -- will make the most of the inventory-free potential of Web-delivered flicks.

It's a blunt assessment, and that's coming from me, someone who's been a Netflix (Nasdaq: NFLX) shareholder, and occasional cheerleader, since 2002.

However, we still have to get through today before we reach tomorrow. And it's going to be a long day, judging by how even dot-com geniuses such as Amazon.com (Nasdaq: AMZN) and Apple (Nasdaq: AAPL) have been looking like chumps in terms of nailing the last mile of digital movie rentals.

Amazon has been renting films through Unbox for a year now. It even delivers movies seamlessly into TiVo (Nasdaq: TIVO) subscribers' DVRs. How many avid Unbox renters do you know?

Then we have Apple, a company that's had limited success with its own hardware solution, Apple TV. What does the market's lukewarm response to Apple TV tell you about the attractiveness of introducing yet another home-theater component into an already crowded living room?

If a cool company that seems to succeed everywhere can't make it go with a set-top box, what chance does Blockbuster -- a company at the other end of the hipness spectrum -- have?

The wrong time for the wrong audienceThis is just a stinker of a move, all the way around. Keep in mind that the typical Blockbuster customer isn't a serial celluloid buff. It's a college kid trying to score a copy of I Am Legend. It's a soccer mom, hoping to entertain the kids over the weekend with Alvin and the Chipmunks. If these were avid movie fans, they'd subscribe to the cheaper all-you-can-eat model through Netflix. Do you really think that will pay a few hundred bucks for an extra clunky box to hook up, and pay for rentals?

Blockbuster has either misread its audience or wildly overestimated the returns from a project like this.

Call me nuts, but I don't think "early adopter" is the first term you'd use to describe the folks filing into a Blockbuster on a weekend afternoon. And since I'm giving consumers enough credit to know that they shouldn't be paying up front for an iffy service put out by a company with nail-biting creditors, what is an otherwise sharp leader like Keyes thinking?

Does anyone remember the last DVD rental company to make an investment in a set-top-box delivery service? It filed for bankruptcy a few months later.

Blockbuster needs to emphasize its physical store footprint, rather than try to squeeze itself into customers' living rooms. If it's serious about digital delivery, let it follow the lead of companies such as Amazon and Netflix in exploring existing devices with hard-drive capacity, such as TiVo, Microsoft's (Nasdaq: MSFT) Xbox 360, and Sony's (NYSE: SNE) PS3.

Thinking outside the box is a tired cliche, but in Blockbuster's case, it's the mantra that can save the company from an embarrassment it can no longer afford.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and shareholder -- since 2002. He also owns shares in TiVo. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he now lives a block from his alma mater.
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